GAS

Pragmatic regulation: Keys to fostering development of Africa’s gas industry

Government policy at present is to regulate and control an industry that is at its infancy, creating uncertainty and driving away much-needed investment in exploration to confirm whether South Africa has offshore and/or onshore oil and gas potential.

At the end of the day, exploration is a calculated role of the dice, the greater the amount of exploration taking place, the greater the likelihood of discovery. And, even if exploration determines South Africa does not have commercial quantities of oil and gas, the country can move forward with other strategies for energy security.

Not knowing whether oil and gas exists in commercial quantities, due to delayed exploration, renders every decision on South Africa’s energy policy and any discussion on energy security to be based on incomplete information.

Had Mozambique not opened its exploration licensing to facilitate exploration, it would have not unlocked what is surely one of the greatest gas discoveries of recent times—expected investments in gas processing and support facilities are expected to exceed the gross domestic product (GDP) of Mozambique (2013: US$ 14.6 billion).

Exploring off the coast of South Africa is a costly affair, with an average exploration project requiring risk capital in excess of R20 billion. A midsize onshore exploration project for shale gas will require risk capital of R10 billion.

International oil and gas companies, with their primary driver being reserves replacement, are keen to invest such risk capital into South Africa, driving up foreign investment into the country at a time when other sectors of South Africa’s economy are under pressure.

Utilising South Africa’s domestic capital stock for such ventures is risky, and could reduce the availability of capital into other less risky, more productive sectors of the economy. In short, South Africa cannot afford to take high risks with its limited capital resources.

Should exploration offshore or onshore prove successful with a discovery in South Africa of at least five-trillion cubic feet or one-billion barrels of oil equivalent, this will change the energy dynamics of the country.

Research suggests a find of 10-trillion cubic feet or two-billion barrels of oil equivalent will be a game changer for South Africa, eliminating the countries budget deficit. The domestic benefits, in terms of the generation of local economic activity, will be significant and could be used to drive a new wave of economic development, notably around power generation, liquid fuels and industry.

An assessment of South Africa’s trade balance indicates that South Africa exports it mineral wealth to the countries from which it imports oil and gas.

We do not know whether oil and gas can be a game changer. However, South Africa needs to encourage exploration and the development of infrastructure to establish the oil and gas sector’s true potential.